Ch 5

1. Which of the following are possible contract periods for forward contracts? a. 30 days b. 65 days c. 97 days d. 1 year, 2 months e. all of the above 2. Assume that as of May 15, a futures contract on 125,000 euros () with a June settlement date is priced at $1.00 per euro. The ______ of this currency futures contract will ________ for the euros on the settlement date. a. seller; pay $125,000 b. buyer; pay $125,000 c. seller; receive $125,000 d. buyer; receive $125,000 e. answers b and c are correct 3. The Swiss franc spot rate is $.90 and the Swiss franc 90-day forward rate is $.88. At what discount or premium is the Swiss franc selling? a. 2.22%, premium b. -2.22%, discount c. -9.09%, discount d. 8.89%, premium e. -8.89%, discount 4. What is the typical initial margin requirement for a currency futures contract? a. $500 b. $1,000-$2,000 c. 5%-10% of the contract d. none of the above 5. Which of the following is a similarity between the currency futures market and the forward market? a. both are self-regulating b. both use standardized contract sizes c. both use standardized delivery dates d. all of the above are similarities e. none of the above are similarities

6. Which of the following factors does not affect the premium of a currency call option? a. level of existing spot price relative to strike price b. length of time before the expiration date c. the currency of the call option d. potential variability of currency e. all of the above are factors 7. Suppose Darlene is a speculator who buys five British pound call options with a strike price of $1.50 and a March expiration date. The current spot price is $1.45. Darlene pays a premium of $0.01 per unit for the call option. Just before expiration, the spot price reaches $1.53, and Darlene exercises the option. Assume one option contract specifies 31,250 units. What is the profit or loss for Darlene? a. $625 b. $3,125 c. $1,250 d. $6,250 e. none of the above 8. Suppose Darlene is a speculator who buys ten British pound put options with a strike price of $1.50 and a March expiration date. The current spot price is $1.55. Darlene pays a premium of $0.02 per unit for the call option. Just before expiration, the spot price reaches $1.48 and Darlene exercises the option. Assume one option contract specifies 31,250 units. What is the profit or loss for Darlene? a. $0 b. $6,250 c. $3,125 d. $625 e. none of the above 9. Peter has purchased a call option on euros () with a strike price of $1.06 and a premium of $0.01. The current spot price of the euro is $1.04. Just before expiration, the euro's spot price is $1.09.What is the per unit profit or loss to the writer of this option? a. $.02 loss b. $.02 profit c. $.03 loss d. $.03 profit 10. The forward rate will usually contain a premium (or discount) that reflects the difference between the home inflation rate and the foreign inflation rate. a. True b. False

11. A non-deliverable forward contract (NDF) is like a regular forward contract because it is for a specified amount and a specified exchange rate. However, it differs from a regular forward contract because it does not have a specified future settlement date. a. True b. False 12. Forward contracts are used primarily by small firms and individuals because they can be tailored to the needs of those clients. a. True b. False 13. A company expects to receive a foreign currency from the sale of merchandise. Because it is nervous about possible exchange rate movements in this currency, it wants to hedge its position with an option in the currency. The appropriate action for them to hedge is to buy a call option. a. True b. False 14. A European-style currency option may only be exercised on the expiration date. a. True b. False 15. If the spot rate of a currency increased substantially over a period, the futures price would likely increase by about the same amount. a. True b. False

Chapter 5: Currency Derivatives

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Chapter 5: Currency Derivatives

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Your Answer Correct? 1. 2. 3. a b e no no yes

Correct Answer e e

Description all of the above answers b and c are correct -8.89%, discount

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

b e c a a b b b b a a a

yes yes yes no yes no yes yes yes no yes yes b a b

$1,000-$2,000 none of the above are similarities the currency of the call option $3,125 $0 $0.02 loss False False False False True True

Chapter 61. Some countries use a _________ exchange rate arrangement, in which their home currency's value is pegged to a foreign currency or to some unit of account.
a. fixed b. freely floating c. managed float d. pegged e. none of the above 2. Currently, the U.S. dollar is under which type of exchange rate system? a. fixed b. freely floating c. managed float d. pegged e. none of the above 3. The U.S. dollar was under which type of exchange rate system from 1944 to 1971? a. fixed b. freely floating c. managed float

d. pegged e. none of the above 4. Which of the following countries suspended participation in the exchange rate mechanism (ERM) of the European Economic Community during the 1992 crisis? a. Britain b. France c. Italy d. Switzerland e. both a and c 5. Which of the following strategies would result in successful sterilized intervention by the Fed if it wanted to make the U.S. dollar depreciate in value? a. sell dollars in the currency markets, buy government treasury bonds b. sell dollars in the currency markets, sell government treasury bonds c. buy dollars in the currency markets, buy government treasury bonds d. buy dollars in the currency markets, sell government treasury bonds e. none of the above 6. Assume the Fed wants to boost exports for the United States. Which of the following strategies would help boost exports? a. raise interest rates b. increase the money supply by selling government bonds c. lower interest rates d. decrease the money supply by selling government bonds e. none of the above 7. Assume the Fed wants to decrease inflation in the United States. Which of the following strategies would help reduce inflation? a. raise interest rates b. increase the money supply by buying government bonds c. lower interest rates d. decrease the money supply by buying government bonds e. none of the above 8. Which of the following statements is not true with respect to the euro since its introduction in 1999? a. its value declined substantially against the British pound, the dollar, and many other currencies from 1999 to 2000 b. there was more money flowing out of Europe and into U.S. and other financial markets than money flowing from these countries to Europe, causing a depreciation of the euro after it was introduced

c. investors preferred to hold assets denominated in dollars, pounds, or yen rather than in euros, contributing to the depreciation of the euro d. all of the above are true with respect to the euro 9. In December 1971, the Bretton Woods Agreement called for a devaluation of the U.S. dollar by about 8 percent against other currencies. a. True b. False 10. A currency board is a system for maintaining the value of the local currency with respect to some other specified currency. To do this, the currency board must have credibility in its promise to maintain the exchange rate. a. True b. False 11. Three members of the European Union initially decided not to participate in the single European currency (euro). These countries are the United Kingdom, Denmark, and Sweden. a. True b. False 12. The European Central Bank is based in Frankfurt and is responsible for setting monetary policy for all participating European countries. Its objective is to control inflation in the participating countries and to stabilize the value of the euro with respect to other major currencies. a. True b. False 13. One method of direct intervention by the U.S. Federal Reserve System in currency markets is to sell dollars and buy foreign currencies to make the U.S. dollar depreciate. a. True b. False 14. Dollarization represents the replacement of a foreign currency with U.S. dollars. This process is a little less drastic than a currency board. a. True b. False
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Chapter 6: Government Influence on Exchange Rates

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6: Government Influence on Exchange Rates

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Your Answer 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. a a b d d c b a a a b b b a

Correct? no no no no no yes no no no yes no no no no a a a b a d b d c a e b

Correct Answer pegged managed float fixed both a and c

Description

sell dollars in the currency markets, sell government treasury bonds lower interest rates raise interest rates all of the above are true with respect to the euro False True True True True False

Bank A quotes a bid price of $1.52 and an ask price of $1.54 for the British pound. Bank B quotes a bid price of $1.51 and an ask price of $1.53 for the British pound. If a trader has $100,000 to invest, what should the trader do to take advantage of locational arbitrage and how much profit would the trader make? a. buy pounds at Bank A, sell pounds at Bank B, make $1,000 b. buy pounds at Bank A, sell pounds at Bank B, make $657.89 c. buy pounds at Bank B, sell pounds at Bank A, make $1,000 d. buy pounds at Bank B, sell pounds at Bank A, make $657.89 e. none of the above, locational arbitrage is not possible 2. National Bank quotes a bid price of $1.15 and an ask price of $1.17 for the euro. City Bank quotes a bid price of $1.10 and an ask price of $1.14 for the euro. If you have $1,000,000 to invest, what would your profit be from conducting locational arbitrage?

a. locational arbitrage is not possible in this situation b. $30,000 c. $10,000 d. $50,000 e. none of the above 3. A bank quotes a bid price of $1.50 for the British pound (), a rate of $0.75 for the Swiss franc (Sf), and a rate of Sf2.02 for the British pound. If I have $100,000 to invest, what should I do to take advantage of triangular arbitrage and how much profit would I make (assume the bid and ask prices are the same)? a. buy pounds with dollars, sell pounds for francs, buy dollars with francs, make $101,000 profit. b. buy pounds with dollars, sell pounds for francs, buy dollars with francs, make $1,000 profit. c. buy francs with dollars, sell francs for pounds, buy dollars with pounds, make $101,000 profit. d. buy francs with dollars, sell francs for pounds, buy dollars with pounds, make $1,000 profit. e. none of the above, triangular arbitrage is not possible. 4. The spot rate is $0.75 for the Swiss franc (Sf), the 180 day forward rate for the Swiss franc is $0.80, the 180 day interest rate in the U.S. is 4%, and the 180 day interest rate in Switzerland is 3%. If I have $100,000 to invest, what would my approximate annual yield be from covered interest arbitrage? a. 9.87% b. 10.93 c. 21.87 d. 19.73% e. none of the above, a covered interest arbitrage profit cannot be made. 5. Assume the Swiss franc has a 90-day interest rate of 3% and the U.S. dollar has a 4% 90-day interest rate. What is the non-annualized discount or premium on the Swiss franc? a. 9.7% premium b. 9.7% discount c. 0.97% premium d. 0.97% discount e. none of the above 6. Assume interest rate parity does not hold, yet covered interest arbitrage is still not possible. Which of the following is not a reason for this anomaly? a. accounting differences b. transaction costs

c. currency restrictions d. differential tax laws e. all of the above are reasons 7. Which of the following forms of arbitrage takes advantage of differentials in cross exchange rates? a. locational arbitrage b. covered interest arbitrage c. triangular arbitrage d. interest rate arbitrage e. none of the above 8. The British pound () is worth $1.60, while the euro () is worth $.95. What is the value of the British pound with respect to the euro? a. 0.59 b. 1.68 c. 1.68 d. 0.59 e. none of the above 9. Arbitrage can be loosely defined as capitalizing on a discrepancy in quoted prices. In many cases, there is no investment of funds tied up for any length of time and no risk involved in the strategy. a. True b. False 10. According to interest rate parity, if the interest rate in the U.S. is greater than the interest rate in Canada, then the Canadian dollar forward rate should be at a discount. a. True b. False 11. If the interest rate in the United Kingdom is 6% and the interest rate in the U.S. is 4%, the approximate premium on the British pound forward rate should be 2%. a. True b. False 12. If interest rate parity exists, then foreign investors will earn the same return as U.S. investors. a. True b. False 13. In triangular arbitrage, currency transactions are conducted in the spot market to capitalize on a discrepancy in the cross exchange rate between two currencies. a. True b. False

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Chapter 7: International Arbitrage and Interest Rate Parity

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Your Answer 1. 3. 6. 7. 10. 11. 12. 13. a a c b b b a a

Correct? no no no no yes yes no yes b e b a c

Correct Answer

Description none of the above, locational arbitrage is not possible buy pounds with dollars, sell pounds for francs, buy dollars with francs, make $1,000 profit. accounting differences triangular arbitrage False False False True

There are various forms of purchasing power parity (PPP) theory. Which form of PPP is also known as the "law of one price"? a. numerical form b. relative form c. accounting form d. absolute form e. none of the above 2. Inflation in the U.S. is 3% and the inflation rate in Europe is 5%. From the perspective of the U.S., what should the euro adjustment be if purchasing power parity (PPP) applies? a. 1.94% appreciation b. -1.9% depreciation c. -1.94% depreciation d. 1.9% appreciation e. none of the above 3. Which of the following is not a reason for deviations in PPP?

a. relative income levels b. trade barriers c. interest rate differentials d. several substitutes for traded goods e. all of the above are reasons for deviations 4. Assume Switzerland has a one-year interest rate of 3% and the U.S. has a 4%, one-year interest rate. If the International Fisher effect (IFE) holds, what would your forecast for the Swiss franc exchange rate with respect to the dollar be? a. 9.7% appreciation b. 9.7% depreciation c. 0.97% appreciation d. 0.97% depreciation e. none of the above 5. Assume the United Kingdom has a one-year interest rate of 6% and the U.S. has a 4%, one-year interest rate. If the spot rate is $1.50 per British pound and the international Fisher effect (IFE) holds, what would you forecast for the future spot rate of the pound in one year (using the simplified method)? a. $1.5288 b. $1.5300 c. $1.4700 d. $1.4717 e. none of the above 6. Which of the following statements is false? a. the international Fisher effect (IFE) uses interest rates to predict forward rates. b. the international Fisher effect (IFE) uses interest rates to predict future spot rates. c. interest rate parity (IRP) uses interest rates to predict forward rates. d. purchasing power parity (PPP) uses inflation rates to predict future spot rates. e. all of the above are true statements. 7. The absolute form of purchasing power parity (PPP) accounts for the possibilities of market imperfections such as transportation costs, tariffs, and quotas. a. True b. False 8. While the relationship between inflation differentials and exchange rates is not perfect even in the long run, recent research supports the use of inflation differentials to forecast long-run movements in exchange rates.

a. True b. False 9. The International Fisher effect (IFE) uses interest rates rather than inflation rate differentials to explain exchange rate changes over time. It is closely related to the PPP theory because interest rates are often not correlated with inflation rates. a. True b. False 10. It is possible for purchasing power parity (PPP) to hold but for the international Fisher effect (IFE) to not hold over the same time period. a. True b. False 11. Unlike purchasing power parity (PPP), the international Fisher effect (IFE) consistently holds over the short run. a. True b. False 12. The international Fisher effect (IFE) and interest rate parity (IRP) use interest rate differentials to predict expected future spot rates. a. True b. False 13. A somewhat simplified statistical test of purchasing power parity (PPP) could be developed by applying regression analysis to historical exchange rates and inflation differentials. a. True b. False
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Chapter 8: Relationships Between Inflation, Interest Rates, and Exchange Rates

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Chapter 8: Relationships Between Inflation, Interest Rates, and Exchange Rates

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Your

Correct?

Correct

Description

Answer 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. a a c c a a b a b a a a a no no no yes no yes yes yes yes yes no no yes b b c d b d

Answer absolute form -1.9% depreciation several substitutes for traded goods .97% appreciation $1.4700 the international Fisher effect (IFE) uses interest rates to predict forward rates. False True False True False False True

Which of the following is not a corporate function that makes exchange rate forecasting necessary? a. hedging decisions b. capital budgeting decisions c. earnings assessments d. short-term investment decisions e. all of the above are corporate functions that make exchange rate forecasting necessary 2. Which of the following is not a method of forecasting exchange rates? a. institutional b. fundamental c. technical d. market-based e. all of the above are general groups for forecasting exchange rates 3. Which of the following is a limitation in fundamental forecasting?

a. uncertain timing of impact b. the forecasts are always inaccurate c. omission of other relevant factors from the model d. both a and c e. all of the above 4. Market-based forecasting is based on what? a. spot rates b. forward rates c. either a or b d. neither a nor b 5. ___________ forecasting involves use of historical exchange rate data to predict future values. a. fundamental b. technical c. market-based d. none of the above 6. Using the mixed forecasting method to predict the value of the Japanese yen, which of the following factors should be considered? a. recent movements in the yen b. Japanese inflation c. the current spot rate of the yen d. all of the above e. none of the above 7. If a forecaster predicts the British pound to be $1.70 in one year, but the spot rate of the pound turns out to be $1.80 in one year, what is the absolute forecast error as a percentage of realized value? a. 5.56% b. -5.56% c. -5.88% d. 5.88% e. none of the above 8. MNC A uses a regression model to forecast the value of the euro in the upcoming period. The following regression model was developed: t = b0+ b1INFt-1 + b2INCt-1, where the two variables are the percentage change in the inflation differential between the U.S. and Europe and the quarterly percentage change in the income growth differential between the U.S. and Europe, respectively. The coefficients for the regression model are: b 0 = 0.005, b1 = 0.9, and b2 = 0.7. In the most recent quarterly, U.S. inflation increased by 1%, while European inflation increased by 2%. Also in the most recent quarter, U.S. income growth

increased by 1.5%, while European income growth increased by 2%. Based on this information, what is the expected change in the euro? a. 0.75% appreciation b. 0.75% depreciation c. 1.05% appreciation d. 0.05% depreciation e. none of the above 9. From a corporate point of view, use of technical forecasting may be limited in that it typically focuses on the near future. a. True b. False 10. Regression analysis, sensitivity analysis, and purchasing power parity (PPP) can be used for fundamental forecasting of exchange rates. a. True b. False 11. The forward rate is considered biased in market-based forecasting because of implications of interest rate parity. a. True b. False 12. Some studies have shown forecast services to be not much more accurate than freely available forecasts. a. True b. False 13. On a graph with X as the predicted value, Y as the realized value, and a 45 degree line drawn from the apex, upward bias would be shown if more points are below the line than above the line. a. True b. False 14. If currency markets are weak-form efficient, then fundamental forecasting cannot be used to improve forecasts. a. True

Chapter 9: Forecasting Exchange Rates

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b. False

Your Answer Correct?

Correct Answer

Description

5. 6. 8. 11. 12. 13. 14.

c a a b a a a

no no no no yes yes no

b d b a

technical all of the above 0.75% depreciation True True True

False

Some have argued the exchange rate risk is irrelevant. Which of the following is not an argument for exchange rate risk irrelevance? a. purchasing power parity argument b. investor hedge argument c. interest rate parity argument d. currency diversification argument e. all of the above are arguments for irrelevance 2. One of the arguments for exchange rate risk irrelevance is that if a U.S.-based MNC is well diversified across numerous countries, its value will not be affected by exchange rate movements because of offsetting affects. This identifies which argument? a. purchasing power parity argument b. investor hedge argument c. interest rate parity argument d. currency diversification argument e. none of the above 3. The exposure of the MNC's consolidated financial statements to exchange rate fluctuations is what type of exposure? a. economic b. translation c. transaction d. none of the above 4. Over the next year, an MNC expects British pound () inflows of 10,000, outflows of 15,000, and a British pound exchange rate of $1.50. It expects Swiss franc (Sf) inflows of Sf30,000, outflows of Sf20,000, and a Swiss franc exchange rate of $0.75. The company expects Mexican peso (p) inflows of p1,000,000, outflows of p1,500,000, and a Mexican peso exchange rate of $0.20. What is this MNC's transaction exposure?

a. -5,000, +Sf10,000, -p500,000 b. +5,000, -Sf10,000, +p500,000 c. -$7,500 on pounds, +$7,500 on francs, +$100,000 on pesos d. -$7,500 on pounds, +$7,500 on francs, -$100,000 on pesos e. none of the above 5. Using the information in question 4, the MNC expects the Swiss franc and the British pound to be perfectly negatively correlated over this year and the peso to have 0 correlation to the pound and the franc. What will be the MNC's transaction exposure? a. The pound and franc exposures will offset, leaving just peso exposure. b. The MNC will still have pound, franc, and peso exposure. c. The MNC will have no exposure because it converts the currencies to dollars. d. None of the above. 6. Translation exposure is not dependent on which of the following? a. accounting methods used b. locations of foreign subsidiaries c. proportion of business conducted by foreign subsidiaries d. translation exposure is dependent on all of the above e. translation exposure is dependent on none of the above 7. The degree to which a firm's present value of future long-term cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure to exchange rates. a. True b. False 8. If a local currency appreciates and the firm's exports are denominated in the local currency, the firm should expect net cash flows from transactions to decrease. a. True b. False 9. A firm without any foreign inflows or outflows (a purely domestic company) is still vulnerable to economic exposure. a. True b. False 10. One method of measuring an MNC's transaction exposure is to classify the cash flows into different income statement items and subjectively predict each income statement item based on a forecast of exchange rates. a. True b. False

11. Under Financial Accounting Standards Board No. 52 (FASB-52), revenues, expenses, and gains and losses of a foreign entity from its functional into the reporting currency is done using the weighted average exchange rate. a. True b. False 12. Most analysts agree that translation exposure is the most relevant form of exposure. a. True

Chapter 10: Measuring Exposure to Exchange Rate Fluctuations

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b. False

Chapter 10: Measuring Exposure to Exchange Rate Fluctuations

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Your Answer 1. 2. 3. 4. 5. 6. 7. 8. 9. b a c a b c a a b

Correct? no no no no yes no no yes no a d b c d b d

Correct Answer

Description interest rate parity argument currency diversification argument translation -$7,500 on pounds, +$7,500 on francs, $100,000 on pesos The MNC will still have pound, franc, and peso exposure. translation exposure is dependent on all of the above False True True

10. 11. 12.

b a b

yes yes yes

False True False

Suppose the home tax rate is high for the parent company and the host country taxes imposed on the subsidiary are low. Which of the following statements is true? a. Capital budgeting projects would look better from the parent's point of view than the subsidiary's point of view. b. Capital budgeting projects would look worse from the parent's point of view than the subsidiary's point of view. c. Capital budgeting projects would look worse from the subsidiary's point of view than the parent's point of view. d. both a and c e. none of the above 2. Suppose the parent company obtains excessive remittances on the subsidiary by charging it high administrative fees. Which of the following statements is probably true? a. Capital budgeting projects would look better from the parent's point of view than the subsidiary's point of view. b. Capital budgeting projects would look worse from the parent's point of view than the subsidiary's point of view. c. Capital budgeting projects would look worse from the subsidiary's point of view than the parent's point of view. d. Both a and c. e. None of the above. 3. Suppose a parent company projects the euro to appreciate over the life of a capital budgeting project for its European subsidiary. Which of the following statements is probably true? a. Capital budgeting projects would look better from the parent's point of view than the subsidiary's point of view. b. Capital budgeting projects would look worse from the parent's point of view than the subsidiary's point of view. c. Capital budgeting projects would look worse from the subsidiary's point of view than the parent's point of view. d. Both a and c. e. None of the above. 4. Which of the following would have a positive affect on the cash flows received by a parent company from a foreign subsidiary? a. blocked funds b. an increase in the relative inflation rate of the host country

c. host government incentives d. both b and c e. all of the above 5. Which of the following would have a negative affect on the cash flows of a foreign subsidiary? a. blocked funds b. a currency depreciation of the host currency c. host government incentives d. all of the above e. none of the above 6. When adjusting project assessment for risk, which of the following is used to generate a probability distribution of net present value (NPV) based on a range of possible values for one or more input variables? a. risk-adjusted discount rate b. sensitivity analysis c. simulation d. both b and c e. none of the above 7. A parent company wishes to compute the net present value (NPV) of a capital budgeting project for its German subsidiary. The initial investment by the parent is $5,000,000. The project will last three years. Estimated remittances to the parent by the German subsidiary are expected to be 2,000,000, 3,000,000, and 2,000,000, in years 1, 2, and 3, respectively. The current spot rate of the euro is $1.03. Exchange rates for the euro are expected to be $1.05, $1.07, and $1.01 in years 1, 2, and 3, respectively. An appropriate discount rate for this project is 12%. What is the NPV of this project? Should the project be undertaken? a. NPV = $2,000,000; undertake project b. NPV = $871,788; undertake project c. NPV = $721,788; undertake project d. NPV = $871,788; do not undertake project e. NPV = $721,788; do not undertake project 8. A withholding tax affects the cash flows of the parent and the subsidiary. a. True b. False 9. The parent's perspective should always be used to decide whether a capital budgeting project should be undertaken. a. True b. False

10. Once the relevant cash flows for a project have been estimated, they should be discounted at the MNC's cost of capital. a. True b. False 11. The net present value (NPV) from the parent's perspective is based on a comparison of the present value of the cash flows received by the parent to the initial outlay by the parent. a. True b. False 12. From the viewpoint of the parent, the joint impact of inflation and exchange rate fluctuations on a subsidiary's net cash flows may produce a partially offsetting effect. a. True b. False 13. Multinational capital budgeting problems should not include debt payments in the measurement of cash flows, because all financing costs are captured by the discount rate. a. True b. False
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Chapter 14: Multinational Capital Budgeting

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Chapter 14: Multinational Capital Budgeting

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Your Answer 1. 2. 3. 4. a a c a

Correct?

Correct Answer b d a d

Description Capital budgeting projects would look worse from the parent's point of view than the subsidiary's point of view. Both a and c. Capital budgeting projects would look better from the parent's point of view than the subsidiary's point of view. both b and c

no no no no

5. 6. 7. 8. 9. 10. 11. 12. 13.

b c e a a b a a a

no yes no no no yes yes yes no

none of the above simulation

b b b

NPV = $871,788; undertake project False False False True True

False

Which of the following is not a form of political risk? a. attitude of consumers in the host country b. attitude of host government c. blockage of fund transfers d. bureaucracy e. all of the above are forms of political risk 2. What type of country risk assessment includes the historical stability of the host government? a. macropolitical risk b. macrofinancial risk c. micropolitical risk d. microfinancial risk e. none of the above 3. What type of country risk assessment is represented by the sensitivity of the firm's business to inflation trends? a. macropolitical risk b. macrofinancial risk c. micropolitical risk d. microfinancial risk e. none of the above 4. The technique to assess country risk that involves the collection of independent opinions on country risk, without group discussion by the assessors who provide these opinions, is called:

a. inspection visits b. discriminant analysis c. regression analysis d. delphi e. none of the above 5. A firm is attempting to quantify country risk. It gives 40% weight to financial factors and 60% to political factors. Political factor A has a 40% weight and a rating of 3; political factor B has a 40% weight and a rating of 4; and political factor C has a 20% weight and a rating of 2. Financial factor A has a 30% weight and a rating of 5, and financial factor B has a 70% weight and a rating of 1. What is the overall country risk rating? a. 2.80 b. 2.70 c. 2.60 d. 3.00 e. none of the above 6. Which of the following is not a method of reducing exposure to host government takeovers? a. hire local labor b. borrow local funds c. use a long-term horizon d. purchase insurance e. all of the above will reduce exposure 7. Currency incompatibility occurs when governments do not allow the home currency to be exchanged into other currencies. a. True b. False 8. Exchange rates, foreign interest rates, and foreign inflation rates are financial risk factors that should be considered when assessing country risk. a. True b. False 9. Regression analysis may be used to assess country risk, since it can measure the sensitivity of one variable to other variables. a. True b. False 10. The foreign investment risk matrix (FIRM) quantifies an overall country risk rating for individual countries. a. True b. False

11. Industrialized countries such as Germany and Japan are assigned a higher political risk rating than economic risk rating. a. True b. False 12. Many home countries of MNCs have investment guarantee programs that insure to some extent the risks of expropriation, wars, or currency blockage. a. True

Chapter 16: Country Risk Analysis

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b. False

Chapter 16: Country Risk Analysis

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Your Answer Correct? 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. a a c c d a b a a b b a no yes no no no no yes yes yes yes no yes

Correct Answer e

Description all of the above are forms of political risk macropolitical risk

d d a c

microfinancial risk delphi 2.80 use a long-term horizon False True True False

True True